Bonds

After years of smooth sailing through calm market conditions, bond markets in East Asia are navigating through stormier weather.

Data from the supplement to the 2015 Asian Development Outlook released this week shows that weaker growth in the United States and the People’s Republic of China (PRC) has weighed down overall regional growth.

Previously there was a good fit between the direction of German bund yields and the euro as this great graphic from Bloomberg illustrates. However, recently the relationship appears to be loosening. Consider that over the past week, the 10-year bund yield is up 3 bp and that is with yesterday’s 3 bp decline. The euro has fallen 1.1% over the same period.

The financial media's look at yesterday's Treasury report on capital flows is myopic. The key take away, they say, is that for the first time since the onset of the global financial crisis, Japanese investors hold more Treasuries than Chinese investors.

All that is solid is melting into the air, or that is how it feels since several central banks in Europe have adopted negative policy rates. Sweden's Riksbank became the latest with today's move (-10 bp). The President of the Swiss National Bank assures us there is a limit, but it is not at the SNB's -75 bp LIBOR target, which is where the Danish central bank has put its key CD rate.

As 2015 gathers pace, the world seems to be entering a more uncertain and unpredictable phase. With the end of the quantitative easing by the Federal Reserve, we are entering an era of tighter global liquidity.

The offshore renminbi bond market has boomed since the Chinese authorities first allowed domestic banks to issue them in Hong Kong in June 2007. But appetite for the paper — popularly known as ‘dim sum bonds’ — is starting to wane as access to onshore markets becomes easier. To stay relevant, the dim sum market must develop further.

On October 9, the UK announced it was beginning the launch of a yuan-denominated bond, becoming the first sovereign, besides China, to do so. It is spurring talk that this is the death of the US dollar.

Over the past few years, the development of RMB (Chinese Yuan) denominated bonds issued offshore (generally referred to as “Dim Sum bonds” in the capital markets) has seen exponential growth. We examine the drivers of this growth and how the market has developed and benefitted from regulatory influences and market participation.